REDWOOD MORTGAGE INVESTORS VII
                       (a California Limited Partnership)
                               Index to Form 10-K

                                December 31, 1997

                                     Part I

                                                                       Page No.
Item 1 - Business                                                           3
Item 2 - Properties                                                       3-5
Item 3 - Legal Proceedings                                                  5
Item 4 - Submission of Matters to a vote of Security Holders (partners)     6

                                     Part II

Item 5 - Market for the Registrants Partners Capital and related matters    6
Item 6 - Selected Financial Data                                          6-7
Item 7 - Managements Discussion and Analysis of Financial condition       8-10
and Results of Operations
Item 8 - Financial Statements and Supplementary Data                     11-34
Item 9 - Changes in and Disagreements with Accountants on Accounting and    35
Financial Disclosure

                                    Part III

Item 10 - Directors and Executive Officers of the Registrant                35
Item 11 - Executive Compensation                                            36
Item 12 - Security Ownership of Certain Beneficial Owners and management    37
Item 13 - Certain Relationships and Related Transactions                    37

                                     Part IV

Item 14 - Exhibits, Financial Statement Schedules, and Reports on
          Form 8- K.                                                     37-38
 
Signatures                                                                  39
<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549
                                    Form 10-K
                Annual Report Pursuant to Section 13 or 15 (d) of
                       the Securities Exchange Act of 1934

     For the year ended December 31, 1997 Commission file number 33-30427
-------------------------------------------------------------------------------

                         REDWOOD MORTGAGE INVESTORS VII
             (Exact name of registrant as specified in its charter)

          California                                             94-3094928
------------------------- -----------------------------------------------------
   (State or other jurisdiction of             (I.R.S. Employer Identification)
   incorporation or organization)

   650 El Camino Real Suite G, Redwood City, CA                 94063
------------------------------------------------------ ------------------------
  (address of principal executive offices)                    (zip code)

Registrants telephone No. including area code              (650) 365-5341
-------------------------------------------------------------------------------

Securities registered pursuant to Section 12(b) of the Act:

Title of each class                   Name of each exchange on which registered
-------------------------------------------------------------------------------
Limited Partnership Units                                       None
-----------------------------------------------------------------------------

Securities registered pursuant to Section 12(g)   Limited Partnership Interests
 of the Act:   

     Indicate by check mark whether the  registrant (1) has filed all reports to
be filed by  Section  13 or 15 (d) of the  Securities  Exchange  Act of 1934 the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports),  and (2) has been subject to such filing requirements for
the past 90 days.

YES               XXXX                                         NO
--------------------------------             ----------------------------------

     Through December 31, 1992, the limited  partnership  units purchased by non
affiliates was 119,983.59 units computed at $100.00 a unit for $11,998,359.  The
offering was closed on September 30, 1992.

Documents incorporated by reference:

     Portions of the Prospectus  dated October 20, 1989, and Supplement #5 dated
February 14, 1992,  filed on form S-11, are  incorporated  in Parts II, III, and
IV.  Exhibits filed as part of Form S-11  Registration  Statement  #33-30427 are
referenced in part IV.
<PAGE>

                                     Part I

Item 1 - Business

     Redwood  Mortgage  Investors  VII, a California  limited  partnership  (the
Partnership),  was  organized in 1989 of which D. Russell  Burwell,  Michael R.
Burwell  and  Gymno  Corporation,  a  California  corporation,  are the  General
Partners.  The address of the General  Partners is 650 El Camino Real,  Suite G,
Redwood  City,  California  94063.  The  Partnership  is  organized to engage in
business  as a mortgage  lender,  for the  primary  purpose  of making  Mortgage
Investments  secured  by  deeds of trust on  California  real  estate.  Mortgage
Investments  are  arranged  and  serviced by Redwood  Home Loan Co., dba Redwood
Mortgage, an affiliate of the General Partners. The Partnerships objectives are
to make investments,  as referred to above,  which will: (i) provide the maximum
possible  cash  returns  which  Limited  Partners  may elect to (a)  receive  as
monthly,  quarterly or annual cash  distributions  or (b) have credited to their
capital  accounts and applied to Partnership  activities;  and (ii) preserve and
protect the Partnerships  capital.  The Partnerships  general business is more
fully described under the section entitled Investment  Objectives and Criteria
pages 26-31 of the Prospectus which is incorporated by reference.

     Originally,  60,000 Units were offered on a best  efforts basis  through
broker/dealer member firms of the National Association of Security Dealers, Inc.
In accordance with the terms of the Prospectus,  the General Partners  increased
the number of units for sale from 60,000 to 120,000 and elected to continue  the
offering until October 19, 1992. The offering  closed on September 30, 1992, and
the Limited Partners  contributed  capital  totalled  $11,998,359 of an approved
$12,000,000  issue,  in units of $100 each. At that date all the  applicants had
been admitted into the Partnership with none left in the applicant  status.  The
final SR report (Report of Sales of Securities  and use of proceeds  therefrom),
was filed on September 21, 1992.

     The Partnership began selling units in October, 1989 and began investing in
mortgages in December, 1989. At December 31, 1997, the Partnership had a balance
in its Mortgage Investments  portfolio totalling $13,449,741 with interest rates
thereon ranging from 6.50% to 15.50%.

     Currently,  Mortgage  Investments  secured by First  Trust  Deeds  comprise
50.63% of the Mortgage  Investment  portfolio  followed by Second Trust Deeds of
42.52%,  and  Third  Trust  Deeds of 5.36%.  A Fourth  Trust  Deed  makes up the
balance.  Owner-occupied  homes,  combined with  non-owner  occupied homes total
19.11% of the Mortgage Investments.  Commercial Mortgage Investments origination
increased from last year, now comprising 68.50% of the portfolio, an increase of
4.96%.  The past  year  brought  many  outstanding  low  loan to  value  lending
opportunities  in the  commercial  segment  of the  market.  76.60% of the total
Mortgage  Investments,  are in six  counties  of the Bay  Area.  The  County  of
Stanislaus  makes  up 9.39%  of the  Mortgage  Investments  and the  balance  of
Mortgage Investments are primarily in Northern  California.  Mortgage Investment
size  increased  this past year,  and is now  averaging  $216,931  per  Mortgage
Investment,  an  increase of $47,406.  Some of the larger  Mortgage  Investments
invested in by the  Partnership  are  fractionalized  between  other  affiliated
partnerships  with  objectives  similar to those of the  Partnership  to further
reduce risk.  Average equity per loan transaction  stood at 39.70%. A 40% equity
average  on  loan  origination  is  generally   considered  very   conservative.
Generally,   the  more  equity,   the  more  protection  for  the  lender.   The
Partnerships Mortgage Investment portfolio is in good condition with properties
in foreclosure as of December, 1997, totalling $409,429.

Item 2 - Properties

     A summary of the Partnerships  Mortgage Investment Portfolio as of December
31, 1997, is set forth below.
<PAGE>

Mortgage Investments as a Percentage of Total Mortgage Investments

First Trust Deeds                                                 $6,810,112.92
Appraised Value of Properties                                     15,343,465.00
  Total Investment as a % of Appraisal                                    44.38%
Second Trust Deed Mortgage Investments                             5,719,368.83
Third Trust Deed Mortgage Investments                                720,258.14
Fourth Trust Deed Mortgage Investments *                             200,001.20
First Trust Deeds due other Lenders                               16,829,319.00
Second Trust Deeds due other Lenders                                 979,402.00
Third Trust Deeds due other Lenders                                  142,858.00

Total Debt                                                       $31,401,320.09

  Appraised Property Value                                        52,077,885.00
  Total Investments as a % of Appraisal                                   60.30%

Number of Mortgage Investments Outstanding                                   62

Average Investment                                                   216,931.31
Average Investment as a % of Net Assets                                    1.68%
Largest Investment Outstanding                                     1,400,000.00
Largest Investment as a % of Net Assets                                   10.87%

Mortgage Investments as a Percentage of Total Mortgage Investments

First Trust Deeds                                                         50.63%
Second Trust Deeds                                                        42.52%
Third Trust Deeds                                                          5.36%
Fourth Trust Deeds                                                         1.49%
                                                             -------------------
Total                                                                    100.00%

Mortgage Investments  by                Amount              Percent
Type of Property

Owner Occupied Homes                   $1,104,742.08            8.22%
Non-Owner Occupied Homes                1,464,596.07           10.89%
Apartments                              1,666,915.50           12.39%
Commercial                              9,213,487.44           68.50%
                                   ------------------      -----------

Total                                 $13,449,741.09          100.00%

* Footnotes on following page

<PAGE>
     The following is a distribution of Mortgage  Investments  outstanding as of
December 31, 1997 by Counties.

County                           Total Mortgage             Percent
                                   Investments

Alameda                             $3,756,697.83            27.93%
San Francisco                        1,878,295.17            13.97%
Santa Clara                          1,795,411.23            13.35%
Contra Costa                         1,286,947.45             9.57%
Stanislaus                           1,262,847.77             9.39%
San Mateo                            1,215,051.36             9.03%
Solano                                 584,430.56             4.34%
Monterey                               473,586.97             3.52%
Sonoma                                 369,725.52             2.75%
El Dorado                              274,178.59             2.04%
Sacramento                             260,004.46             1.93%
Santa Cruz                             119,812.96             0.89%
Ventura                                 91,000.00             0.68%
Shasta                                  81,751.22             0.61%
                                ------------------       -----------

Total                              $13,449,741.09           100.00%

     * Redwood Mortgage Investors VII, together with other Redwood Partnerships,
hold a second and a fourth trust deed against the secured property. In addition,
the principals behind the borrower corporation have given personal guarantees as
collateral.  The overall  loan to value ratio at the  inception of this loan was
76.52%.  In addition to the  borrower  paying an  interest  rate of 12.25%,  the
Partnership  and other  lenders will also  participate  in profits.  The General
Partners  have had previous  loan  activity  with this  borrower  which had been
concluded  successfully,  with extra earnings earned for the other  partnerships
involved.


Statement of Condition of Mortgage Investments

Number of Mortgage Investments in Foreclosure                   2


Item 3 - Legal Proceedings

     In the normal  course of business the  Partnership  may become  involved in
various types of legal  proceedings  such as  assignments  of rents,  bankruptcy
proceedings,   appointments   of   receivers,   unlawful   detainers,   judicial
foreclosures, etc., to enforce the provisions of the deeds of trust, collect the
debt owed under the promissory  notes or to  protect/recoup  its investment from
the real property  secured by the deeds. As of the date hereof,  the Partnership
is not  involved  in any  legal  proceedings  other  than  those  that  would be
considered part of the normal course of business.  Management  anticipates  that
the ultimate  result of these cases will not have a material  adverse  effect on
the net assets of the Partnership,  with due consideration  having been given in
arriving at the allowance for doubtful accounts.
<PAGE>
Item 4 - Submission of matters to vote of Security Holders (Partners).

No matters have been submitted to a vote of the Partnership.

                                     Part II

Item 5 - Market for the Registrants Units and Related Partnership Matters.

     120,000  units  at $100  each  (minimum  20  units)  were  offered  through
broker-dealer  member firms of the National Association of Securities Dealers on
a best efforts basis (as indicated in Part I item 1).  Investors have the option
of withdrawing earnings on a monthly,  quarterly, or annual basis or reinvesting
and compounding the earnings. Limited Partners may withdraw from the Partnership
in accordance  with the terms of the Partnership  Agreement  subject to possible
early withdrawal penalties. There is no established public trading market.

     A  description  of  the  Partnership  units,   transfer   restrictions  and
withdrawal  provisions  is more  fully  described  under  the  section  entitled
Description of Units and summary of Limited Partnership  Agreement,  pages 47 to
50 of the Prospectus, a part of the referenced Registration Statement,  which is
incorporated by reference.

Item 6 - Selected Financial Data

     Redwood Mortgage Investors VII began operations in December 1989. Financial
results  for  years  1984 to 1989 for prior  partnerships  are  incorporated  by
reference to the  Prospectus  (S-11) dated  October 20, 1989,  Table III pages 7
through  11 and  Supplement  No. 3 dated  October  2, 1990 to  Prospectus  dated
October 20, 1989, Table III pages 27 through 33.

     Financial  condition and results of operation for the Partnership for three
years to December 31, 1997 were:
<TABLE>

                                                             Balance Sheet
                                                                Assets

                                                                          December 31,
                                                      ------------------------------------------------------

<CAPTION>
<S>                                                            <C>                  <C>                <C> 
                                                               1997                 1996               1995
                                                      --------------       --------------      -------------
Cash                                                       $520,837             $755,089           $514,840
Accounts Receivable:
   Mortgage Investments secured by Deeds of Trust        13,449,741           12,036,293         12,382,641
   Accrued interest and other fees                          427,952              264,495            940,541
   Advances on Mortgage Investments                          33,154               41,203            110,874
   Other receivables - Unsecured                            252,422              337,242            378,200
   Less allowance for losses                              (424,738)            (228,647)          (200,000)
Real Estate Owned acquired through foreclosure at
    estimated net realizable value                          687,139            1,468,345          1,347,997
Partnership Interest                                        346,017              242,394            223,245
Organization cost net of amortization                             0                    0                368

                                                      --------------       --------------      -------------
                                                        $15,292,524          $14,916,414        $15,698,706
                                                      --------------       --------------      -------------


<PAGE>
</TABLE>

<TABLE>
                                                   Liabilities and Partners Capital

                                                                           December 31,
                                                      -------------------------------------------------------
                                                               1997                1996                 1995
                                                      --------------      --------------       --------------
<CAPTION>
                                                     
Liabilities:
<S>                                                      <C>                 <C>                  <C>       
Note payable - Bank                                      $2,341,816          $1,175,000           $2,000,000
Accounts payable and accrued expenses                         1,845               1,472                1,472
Discount of Mortgage Investments                             69,316             154,598                    0
                                                      --------------      --------------       --------------
                                                          2,412,977           1,331,070            2,001,472

Partners Capital:
  General Partners                                           11,978              11,978               11,841
  Limited Partners subject to redemption                 12,867,569          13,573,366           13,685,393
                                                      --------------      --------------       --------------
     Total Partners Capital                              12,879,547          13,585,344           13,697,234
                                                      --------------      --------------       --------------


                                                        $15,292,524         $14,916,414          $15,698,706
                                                      --------------      --------------       --------------


                                                          Statement of Income

Gross revenue                                            $1,623,863          $1,580,500           $1,483,881
Expenses                                                    796,984             721,401              571,921
                                                      --------------      --------------       --------------


Net Income                                                 $826,879            $859,099             $911,960
                                                      --------------      --------------       --------------

Net income to General Partners (1%)                          $8,269              $8,591               $9,120
                                                      ==============      ==============       ==============

Net Income to Limited Partners (99%)                       $818,610            $850,508             $902,840
                                                      ==============      ==============       ==============


Net Income per $1,000 invested by Limited
 Partners for entire period:
   - where income is reinvested and compounded                  $61                 $60                  $60
                                                      ==============      ==============       ==============

   - where partner receives income in monthly
       distributions                                            $59                 $59                  $58
                                                      ==============      ==============       ==============
<FN>

     Net income in 1995 averaged at an annualized  yield of 6.00%.  In 1996, the
annualized yield was 6.02% and in 1997 the annualized  yield was 6.10%.  Average
annualized yield since inception through December 31, 1997, 7.90%
</FN>

</TABLE>
<PAGE>
            MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATIONS

     On September 30, 1992, the Partnership  had sold  119,983.59  units and its
contributed  capital totaled  $11,998,359 of the approved  $12,000,000 issue, in
units of $100 each.  As of that date,  the  offering  was  formally  closed.  At
December 31, 1996, Partners Capital totaled $13,585,344.

     At December 31, 1997,  the  Partnership  Mortgage  Investments  outstanding
totalled  $13,449,741.   Mortgage  Investments  increased  from  $12,036,293  to
$13,449,741  during 1997, an increase of $1,413,448,  chiefly due to the ability
of the General  Partners to reduce the net amounts invested in real estate owned
(REO) by  $781,206  during the year and by  increasing  the  amount of  Mortgage
Investments  held at year end funded  through the use of the bank line of credit
by increasing  bank credit line borrowing to $2,341,816 as of December 31, 1997,
from  $1,175,000  as of December 31,  1996.  The ability of the  Partnership  to
invest the proceeds  from the sale of REO and bank line of credit  borrowings in
new Mortgage  Investments  was  partially  offset by  withdrawals  of income and
capital  by the  Limited  Partners  in the  net  amount  of  $705,797.  Mortgage
Investments decreased slightly, by $346,348,  during the year ended December 31,
1996,  from  $12,382,641  as of December 31, 1995, to $12,036,293 as of December
31, 1996.  This  Mortgage  Investment  reduction  was due primarily to a reduced
usage of the bank  line of  credit.  The  effect  of more  outstanding  Mortgage
Investments in 1997, was an increase in the gross amount of interest earned from
Mortgage  Investments.  The Partnership  began funding  Mortgage  Investments on
December  27,  1989,  and as of December  31,  1997,  had  credited the Partners
accounts with income at an average annualized (compounded) yield of 7.90%.

     Currently,  mortgage  interest rates are lower than those  prevalent at the
inception of the Partnership.  New Mortgage  Investments are being originated at
these lower  interest  rates.  The result is a reduction  of the average  return
across the entire  portfolio held by the  Partnership.  In the future,  interest
rates likely will change from their current levels.  The General Partners cannot
at this time predict at what levels  interest  rates will be in the future.  The
General  Partners  believe the rates charged by the Partnership to its borrowers
will not change  significantly  in the  immediate  future.  Based upon the rates
payable in connection with the existing  Mortgage  Investments,  the current and
anticipated interest rates to be charged by the Partnership, and current reserve
requirements,  the General  Partners  anticipate that the annualized  yield next
year will range somewhat slightly higher from its current rate of 6.10%.

     The  Partnership has a line of credit with a commercial bank secured by its
Mortgage  Investments to a limit of $3,000,000,  at a variable interest rate set
at one half  percent  above the prime rate.  As of  December  31,  1997,  it has
borrowed  $2,341,816.  This facility could increase as the  Partnership  capital
increases. This added source of funds helped in maximizing the Partnership yield
by  allowing  the  Partnership  to  minimize  the amount of funds in lower yield
investment  accounts when  appropriate  Mortgage  Investments  are not currently
available.  Since most of the Mortgage  Investments made by the Partnership bear
interest at a rate in excess of the rate payable to the bank which  extended the
line of credit, once the required principal and interest payments on the line of
credit are paid to the bank, the Mortgage  Investments  funded using the line of
credit  generate  revenue for the  Partnership.  As of December  31,  1997,  the
Partnership  is current  with its  interest  payments on the line of credit.  In
1994,  the  Partnership  incurred  $135,790 of interest  on note  payables.  The
interest  rate on the line of credit  was Prime + 3/4% and the  Partnership  was
able to maintain a positive  spread  between the cost of borrowing the funds and
interest earned on lending the funds. In 1995, the Partnership incurred $163,361
of interest on note payables  reflecting a small increase in the overall average
credit balance  outstanding.  The Partnership still maintained a positive spread
between the cost of borrowing  the funds and the interest  earned in lending the
funds.  In  1996,   interest  payments  decreased  to  $127,454  reflecting  the
Partnerships  overall  smaller  average  outstanding  credit  line  balance due
primarily to a large number of Mortgage Investment payoffs. For the current year
through  December 31, 1997,  interest  paid was $198,316  reflecting  an overall
greater utilization of the credit line from the previous three years.
<PAGE>
     The Partnerships income and expenses, accruals and delinquencies are within
the  normal  range of the  General  Partners  expectations,  based  upon  their
experience in managing similar partnerships over the last twenty years. Borrower
foreclosures,  as set forth under Results of Operations,  are a normal aspect of
Partnership  operations and the General  Partners  anticipate that they will not
have a material  effect on  liquidity.  As of December 31, 1997,  there were two
properties in  foreclosure.  Cash is constantly  being  generated  from interest
earnings,  late  charges,   pre-payment  penalties,   amortization  of  Mortgage
Investments  and  pay-off on notes.  Currently,  cash flow  exceeds  Partnership
expenses and earnings payout requirements.  As Mortgage Investment opportunities
become  available,  excess cash and available funds are invested in new Mortgage
Investments.

     The General Partners  regularly review the Mortgage  Investment  portfolio,
examining the status of delinquencies,  the underlying collateral securing these
properties,  the REO expenses and sales  activities,  borrowers payment records,
etc.  Data on the local real estate market and on the national and local economy
are  studied.  Based upon this  information  and other data,  loss  reserves are
increased  of  decreased.  Because  of the  number on  variables  involved,  the
magnitude of the possible swings and the General  Partners  inability to control
many of these factors,  actual results may and do sometimes differ significantly
from  estimates  made by the General  Partners.  Management  provided  $306,779,
$419,437  and $434,495 as  provision  for doubtful  accounts for the years ended
December 31,  1995,  1996 and 1997,  respectively.  The  provision  for doubtful
account  increased by $112,658 in 1996 as the General  Partners  determined that
additional  provision for doubtful  accounts  should be made to cover  potential
losses  in REO  accounts  or  potential  losses  on  unsecured  receivables  and
unspecified  losses. The provision for doubtful account was increased by $15,058
in  1997,  to  $434,495  as the  selling  of REO  accumulated  primarily  in the
California  recession  of the early to mid  1990s  netted  less  proceeds  than
originally   anticipated  and  the  General  Partners   further   refinement  of
anticipated   sales  proceeds  on  remaining   REO,   collections  of  unsecured
receivables,  and additional  provisions for  unspecified  losses.  The Northern
California  recession reached bottom in 1993. Since then, the California economy
has been improving,  slowly at first, but now, more vigorously. This improvement
is reflective in increasing  property  values,  in job growth,  personal  income
growth,  etc.,  which  all  translates  into an  improved  real  estate  market,
solidifying   real  estate  values,   and  an  attractive  real  estate  lending
marketplace.

     The Partnership interest in land, acquired through foreclosure,  located in
East Palo Alto with costs  totalling  $346,017  and $242,394 for the years ended
December  31, 1997 and 1996,  respectively  has been  invested  with that of two
other  Partnerships  in a  partnership  which  is in the  process  of  obtaining
approval for  constructing  approximately  63 single family homes for sale. (The
Development).  The proposed Development has gained significant public awareness.
Incorporated into the proposed  Development are various mitigation  measures not
limited  to,  mitigation  of  hazardous  materials  existing  on  the  property,
endangered species,  and proximity to the San Francisco Baylands.  The preceding
issues and others have sparked significant public  controversy.  Opposition both
for and against the proposed Development exists.  Notwithstanding the above, the
General Partners believe that pursuit of the proposed Development approval to be
in the interest of the  Partnership.  This investment has been classified in the
financial statements as Investment in Partnership.

     At the time of subscription to the  Partnership,  Limited  Partners made an
irrevocable decision to either take distributions of earnings monthly, quarterly
or annually or to compound  earnings  in their  capital  account.  For the years
ended  December  31,  1995,  December  31,  1996  and  December  31,  1997,  the
Partnership made  distributions of earnings to Limited Partners after allocation
of  syndication  costs  of,  $262,450,   $327,887  and  $399,379   respectively.
Distribution  of Earnings to Limited  Partners  after  allocation of syndication
costs for the years ended December 31, 1995,  December 31, 1996 and December 31,
1997,  to Limited  Partners  capital  accounts and not  withdrawn was $640,390,
$522,621, and $419,231 respectively.  As of December 31, 1995, December 31, 1996
and  December  31,  1997,   Limited  Partners   electing  to  withdraw  earnings
represented 36%, 44% and 53% of the Limited Partners capital.
<PAGE>

     The Partnership  also allows the Limited Partners to withdraw their capital
account  subject  to  certain   limitations  (see   liquidation   provisions  of
Partnership  Agreement).  For the years ended  December 31,  1995,  December 31,
1996, and December 31, 1997, $106,901, $412,798 and $475,348 respectivley,  were
liquidated  subject to the 10% penalty for early  withdrawal.  These withdrawals
are within the normally anticipated range that the General Partners would expect
in their experience in this and other partnerships.  The General Partners expect
that a small  percentage  of  Limited  Partners  will elect to  liquidate  their
capital  accounts  over  one  year  with  a 10%  early  withdrawal  penalty.  In
originally  conceiving the  Partnership,  the General Partners wanted to provide
Limited   Partners  needing  their  capital  returned  a  degree  of  liquidity.
Generally, Limited Partners electing to withdraw over one year need to liquidate
investment  to  raise  cash.  The  trend  the  Partnership  is  experiencing  in
withdrawals  by  Limited  Partners  electing  a  one  year  liquidation  program
represents  a small  percentage  of Limited  Partner  capital as of December 31,
1995,  December 31, 1996 and December 31, 1997,  respectively and is expected by
the General Partners to commonly occur at these levels.

     Additionally,  for the years ended December 31, 1995, December 31, 1996 and
December 31, 1997, $97,801, $318,902 and $737,568 respectively,  were liquidated
by Limited Partners who have elected a liquidation program over a period of five
years or longer.  This ability to withdraw after five years by Limited  Partners
has the effect of providing Limited Partner liquidity which the General Partners
then expect a portion of the Limited  Partners to avail  themselves of. This has
the  anticipated   effect  of  the  Partnership   growing,   primarily   through
reinvestment of earnings in years one through five. The General  Partners expect
to see increasing  numbers of Limited Partner  withdrawals in years five through
eleven,  at  which  time  the bulk of those  Limited  Partners  who have  sought
withdrawal  have been  liquidated.  After  year  eleven,  liquidation  generally
subsides and the Partnership capital again tends to increase.

     Actual  liquidation  of both  capital  and  earnings  from year five (1994)
through year eight (1997) is shown hereunder:
<TABLE>

                                                       Years ended December 31,
<CAPTION>

                          1994                   1995                  1996                  1997
                  -------------         --------------        --------------        --------------
<S>                   <C>                     <C>                   <C>                   <C>    
Earnings              $263,206                270,760               336,341               399,379
Capital              *$340,011                184,157               722,536             1,212,916
                  =============         ==============        ==============        ==============
Total                 $603,217               $454,917            $1,058,877            $1,612,295
                  =============         ==============        ==============        ==============
<FN>
* These amounts represent gross of early withdrawal penalties.
</FN>
</TABLE>
<PAGE>


              Item 8 - Financial Statements and Supplementary Data

     Redwood Mortgage Investors VII, a California Limited  Partnership's list of
Financial Statements and Financial Statement schedules:

A-Financial Statements

     The following  financial  statements of Redwood Mortgage  Investors VII are
included in Item 8:


Independent Auditors Report,
Balance Sheets - December 31, 1997, and December 31, 1996,
Statements of Income for the three years ended December 31, 1997,
Statements of Changes in Partners Capital for the three years ended December 31,
1997,
Statements of Cash Flows for the three years ended December 31, 1997,
Notes to Financial Statements - December 31, 1997.

B-Financial Statement Schedules

     The following  financial  statement schedules of Redwood Mortgage Inventors
VII are included in Item 8.

Schedule II     Amounts receivable from related parties and underwriters,
                promoters, and employees other than related parties
Schedule VIII   Valuation of Qualifying Accounts
Schedule IX     Short Term Borrowings
Schedule XII    Mortgage loans on real estate

     All  other  schedules  for  which  provision  is  made  in  the  applicable
accounting  regulations  of the  Securities  and  Exchange  Commission  are  not
required under the related instructions or are inapplicable,  and therefore have
been omitted.
<PAGE>



                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                              FINANCIAL STATEMENTS
                                DECEMBER 31, 1997
                         (With Auditors Report Thereon)

<PAGE>

                                PARODI & CROPPER
                          CERTIFIED PUBLIC ACCOUNTANTS
                       3658 Mount Diablo Blvd., Suite #205
                               Lafayette CA 94549
                                 (510) 284-3590




                           INDEPENDENT AUDITORS REPORT


THE PARTNERS
REDWOOD MORTGAGE INVESTORS VII

     We have audited the financial  statements and related  schedules of REDWOOD
MORTGAGE  INVESTORS VII (A California Limited  Partnership)  listed in Item 8 on
form 10-K  including  balance  sheets as of  December  31, 1997 and 1996 and the
statements of income,  changes in partners capital and cash flows for the three
years ended December 31, 1997. These financial statements are the responsibility
of the Partnerships management.  Our responsibility is to express an opinion on
these financial statements based on our audits.

     We conducted  our audits in accordance  with  generally  accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

     In our opinion,  the financial statements referred to above present fairly,
in all material  respects,  the financial position of REDWOOD MORTGAGE INVESTORS
VII as of December 31, 1997 and 1996, and the results of its operations and cash
flows for the three years ended  December 31, 1997 in conformity  with generally
accepted  accounting  principles.  Further, it is our opinion that the schedules
referred to above present fairly the information set forth therein in compliance
with the  applicable  accounting  regulations  of the  Securities  and  Exchange
Commission.


                              /s/ Parodi & Cropper
                                PARODI & CROPPER








Lafayette, California
February 27, 1998

<PAGE>
<TABLE>
                                                    REDWOOD MORTGAGE INVESTORS VII
                                                  (A California Limited Partnership)
                                                            BALANCE SHEETS
                                                      DECEMBER 31, 1997 AND 1996
<CAPTION>
                                                                ASSETS
                                                                                1997                1996
                                                                            --------------      --------------

<S>                                                                              <C>                 <C>     
Cash                                                                             $520,837            $755,089
                                                                            --------------      --------------
Accounts receivable:
  Mortgage Investments, secured by deeds of trust                              13,449,741          12,036,293
  Accrued Interest on Mortgage Investments                                        427,952             264,495
  Advances on Mortgage Investments                                                 33,154              41,203
  Accounts receivables, unsecured                                                 252,422             337,242
                                                                            --------------      --------------
                                                                               14,163,269          12,679,233
  Less allowance for doubtful accounts                                            424,738             228,647
                                                                            --------------      --------------

                                                                               13,738,531          12,450,586
                                                                            --------------      --------------

Real estate owned, acquired through foreclosure, held for sale                    687,139           1,468,345
Investment in partnership                                                         346,017             242,394
                                                                            --------------      --------------

                                                                              $15,292,524         $14,916,414
                                                                            ==============      ==============

                                                   LIABILITIES AND PARTNERS CAPITAL

Liabilities:
  Notes payable - bank line of credit                                          $2,341,816          $1,175,000
  Accounts payable and accrued expenses                                             1,845               1,472
  Deferred Interest                                                                69,316             154,598
                                                                            --------------      --------------
                                                                                2,412,977           1,331,070
                                                                            --------------      --------------
Partners Capital
  Limited partners capital, subject to redemption (Note 4E):
     Net of Formation Loan receivable of $341,275 and $429,163 for
         1997 and 1996, respectively                                           12,867,569          13,573,366

  General partners  capital,                                                       11,978              11,978
                                                                            --------------      --------------

           Total Partners  Capital                                             12,879,547          13,585,344
                                                                            --------------      --------------

           Total Liabilites and Partners  Capital                             $15,292,524         $14,916,414
                                                                            ==============      ==============
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>

<TABLE>
                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                              STATEMENTS OF INCOME
                   FOR THE THREE YEARS ENDED DECEMBER 31, 1997

<CAPTION>
                                                                            YEARS ENDED DECEMBER 31,
                                                               ----------------------------------------------------
                                                                   1997                1996              1995
                                                               -------------       -------------     --------------
Revenues:
<S>                                                              <C>                 <C>                <C>       
  Interest on Mortgage Investments                               $1,593,335          $1,527,450         $1,464,136
  Interest on bank deposits                                           7,882              10,228              8,407
  Late charges                                                        8,598              17,266              9,038
  Other                                                              14,048              25,556              2,300
                                                               -------------       -------------     --------------
                                                               -------------       -------------     --------------
                                                                  1,623,863           1,580,500          1,483,881
                                                               -------------       -------------     --------------

Expenses:
  Mortgage sevicing fees                                             83,559              97,267             33,394
  Interest on note payable - bank                                   198,316             127,454            163,361
  Clerical costs through Redwood Mortgage                            37,760              40,874             27,762
  Amortization of organization costs                                      0                 368              2,016
  Provision for doubtful accounts and losses
   on real estate acquired through foreclosure                      434,495             419,437            306,779
  Professional services                                              25,107              18,802             19,557
  Printing, supplies and postage                                     11,997              12,466             14,703
  Other                                                               5,750               4,733              4,349
                                                               -------------       -------------     --------------
                                                                    796,984             721,401            571,921
                                                               -------------       -------------     --------------


Net Income                                                         $826,879            $859,099           $911,960
                                                               =============       =============     ==============

Net income:  To General Partners(1%)                                 $8,269              $8,591             $9,120
                     To Limited Partners (99%)                      818,610             850,508            902,840
                                                               =============       =============     ==============
                                                                   $826,879            $859,099           $911,960
                                                               =============       =============     ==============

Net income per $1,000 invested by Limited
 Partners for entire period:
     -where income is reinvested and  compounded                        $61                $ 60               $ 60
                                                               =============       =============     ==============

     -where partner receives income in monthly distributions            $59                $ 59               $ 58
                                                               =============       =============     ==============


<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                    STATEMENTS OF CHANGES IN PARTNERS CAPITAL
                   FOR THE THREE YEARS ENDED DECEMBER 31, 1997


                                                                     PARTNERS CAPITAL
                                         ---------------------------------------------------------------------------
                                                                 LIMITED PARTNERS CAPITAL
                                         ---------------------------------------------------------------------------

                                            Capital
                                            Account          Unallocated         Formation
                                            Limited          Syndication            Loan
                                           Partners             Costs            Receivable           Total
                                         --------------     ---------------    ---------------    --------------
<CAPTION>
<S>                                        <C>                   <C>               <C>              <C>        
Balances at December 31, 1994              $13,839,989           $(97,088)         $(604,939)       $13,137,962

Formation Loan collections                           0                   0             80,542            80,542
Net income                                     902,840                   0                  0           902,840
Allocation of syndication costs               (80,190)              80,190                  0                 0
Early withdrawal penalties                    (10,690)               3,310              7,346              (34)
Partners  withdrawals                        (435,917)                   0                  0         (435,917)
                                         --------------     ---------------    ---------------    --------------

Balances at December 31, 1995               14,216,032            (13,588)          (517,051)        13,685,393

Formation Loan collections                           0                   0             62,225            62,225
Net income                                     850,508                   0                  0           850,508
Allocation of syndication costs               (13,588)              13,588                  0                 0
Early withdrawal penalties                    (37,345)                   0             25,663          (11,682)
Partners  withdrawals                      (1,013,078)                   0                  0       (1,013,078)
                                         --------------     ---------------    ---------------    --------------

Balances at December 31, 1996              $14,002,529                  $0         $(429,163)       $13,573,366

Foramtion Loan collections                           0                   0             60,223            60,223
Net Income                                     818,610                   0                  0           818,610
Early withdrawal penalties                    (40,258)                   0             27,665          (12,593)
Partners  withdrawals                      (1,572,037)                   0                  0       (1,572,037)
                                         --------------     ---------------    ---------------    --------------

Balances at December 31, 1997              $13,208,844                  $0         $(341,275)       $12,867,569
                                         ==============     ===============    ===============    ==============

<FN>
See accompanying notes to financial statements
</FN>
</TABLE>
<PAGE>

<TABLE>
                                                    REDWOOD MORTGAGE INVESTORS VII
                                                  (A California Limited Partnership)
                                              STATEMENTS OF CHANGES IN PARTNERS CAPITAL
                                              FOR THE THREE YEARS ENDED DECEMBER 31, 1997


                                                                       PARTNERS CAPITAL
                                         ------------------------------------------------------------------------------
                                                         GENERAL PARTNERS CAPITAL
                                         ----------------------------------------------------------
                                          Capital Account         Unallocated                               Total
                                         General Partners      Syndication Costs                          Partners
                                                                                          Total            Capital
                                         ------------------    -------------------     ------------    ----------------
<CAPTION>
<S>                                                <C>                     <C>             <C>             <C>        
Balances at December 31, 1994                      $11,978                 $(981)          $10,997         $13,148,959

Formation Loan collections                               0                      0                0              80,542
Net income                                           9,120                      0            9,120             911,960
Allocation of syndication costs                      (810)                    810                0                   0
Early withdrawal penalties                               0                     34               34                   0
Partners  withdrawals                              (8,310)                      0          (8,310)           (444,227)
                                         ------------------    -------------------     ------------    ----------------

Balances at December 31, 1995                       11,978                  (137)           11,841          13,697,234

Formation Loan collections                               0                      0                0              62,225
Net income                                           8,591                      0            8,591             859,099
Allocation of syndication costs                      (137)                    137                0                   0
Early withdrawal penalties                               0                      0                0            (11,682)
Partners  withdrawals                              (8,454)                      0          (8,454)         (1,021,532)
                                         ------------------    -------------------     ------------    ----------------

Balances at December 31, 1996                       11,978                      0           11,978          13,585,344

Formation Loan collections                               0                      0                0              60,223
Net income                                           8,269                      0            8,269             826,879
Early withdrawal penalties                               0                      0                0            (12,593)
Partners  withdrawals                              (8,269)                      0          (8,269)         (1,580,306)
                                         ------------------    -------------------     ------------    ----------------

Balances at December 31, 1997                      $11,978                     $0          $11,978         $12,879,547
                                         ==================    ===================     ============    ================

<FN>
See accompanying notes to financial statements
</FN>
</TABLE>
<PAGE>
<TABLE>
                                                    REDWOOD MORTGAGE INVESTORS VII
                                                  (A Califonira Limited Partnership)
                                                       STATEMENTS OF CASH FLOWS
                                              FOR THE THREE YEARS ENDED DECEMBER 31, 1997

                                                                                YEARS ENDED DECEMBER 31,
                                                                   ----------------------------------------------------
<CAPTION>

                                                                           1997              1996               1995
                                                                       -------------     -------------      -------------
Cash flows from operating activities:
<S>                                                                        <C>               <C>                <C>     
  Net income                                                               $826,879          $859,099           $911,960
  Adjustments to reconcile net income to net cash provided by
      operating activities:
    Amortization of organization costs                                            0               368              2,016
    Provision for doubtful accounts                                         374,499           204,398             74,812
    Provision for losses on real estate held for sale                        59,996           215,039            231,967
    Early withdrawal penalty credited to income                            (12,593)          (11,682)                  0
    (Increase) decrease in accrued interest & advances                    (155,408)           745,717          (284,506)
    Increase (decrease) in accounts payable and accrued expenses                373                 0            (1,501)
    (Increase) decrease in amount due from or to Redwood Mortgage                 0                 0            (5,663)
    Increase (decrease) in deferred interest on Mortgage Investments       (85,282)           154,598                  0
                                                                       -------------     -------------      -------------

      Net cash provided by operating activities                           1,008,464         2,167,537            929,085
                                                                       -------------     -------------      -------------

Cash flows from investing activities:
    Principal collected on mortgage investments                           6,278,832         8,923,339          1,980,879
    Mortgage Investments made                                           (7,841,128)       (9,099,688)        (3,592,507)
    Additions to Real Estate held for sale                                (202,645)         (147,733)          (170,194)
    Dispositions of real estate held for sale                               979,115           200,250          1,198,211
    Investment in partnership                                             (103,623)          (19,149)                  0
                                                                       -------------     -------------      -------------

      Net cash provided by (used in) investing activities                 (889,449)         (142,981)          (583,611)
                                                                       -------------     -------------      -------------

Cash flows from financing activities:
  Net increase (decrease) in note payable-bank                            1,166,816         (825,000)             70,370
  Formation loan collections                                                 60,223            62,225             80,542
  Partners withdrawals                                                  (1,580,306)       (1,021,532)          (444,227)

                                                                       -------------     -------------      -------------
      Net cash provided by (used in) financing activities                 (353,267)       (1,784,307)          (293,315)
                                                                       -------------     -------------      -------------

Net increase (decrease) in cash                                           (234,252)           240,249             52,159

Cash - beginning of period                                                  755,089           514,840            462,681
                                                                       -------------     -------------      -------------

Cash - end of period                                                       $520,837          $755,089           $514,840
                                                                       =============     =============      =============
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>

                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 1997

NOTE 1 - ORGANIZATION AND GENERAL

     Redwood Mortgage  Investors VII, (the Partnership) is a California  Limited
Partnership,  of which the General Partners are D. Russell  Burwell,  Michael R.
Burwell and Gymno  Corporation,  a California  corporation owned and operated by
the individual  General  Partners.  The  Partnership  was organized to engage in
business  as a  mortgage  lender  for the  primary  purpose  of making  Mortgage
Investments  secured  by  Deeds of Trust on  California  real  estate.  Mortgage
Investments  are being  arranged  and  serviced  by Redwood  Home Loan Co.,  dba
Redwood Mortgage,  an affiliate of the General Partners.  At September 30, 1992,
the offering had been closed with contributed  capital totaling  $11,998,359 for
limited partners.

     A  minimum  of 2,500  units  ($250,000)  and a  maximum  of  120,000  units
($12,000,000)  were  offered  through  qualified  broker-dealers.   As  Mortgage
Investments were identified,  partners were transferred from applicant status to
admitted partners participating in Mortgage Investment operations.  Each months
income is allocated to partners based upon their proportionate share of partners
capital.  Some partners have elected to withdraw income on a monthly,  quarterly
or annual basis.

A. Sales Commissions - Formation Loan

     Sales  commissions  ranging from 0% (Units sold by General Partners) to 10%
of the gross proceeds were paid by Redwood Mortgage, an affiliate of the General
Partners  that  arranges and services the Mortgage  Investments.  To finance the
sales commissions, the Partnership was authorized to loan to Redwood Mortgage an
amount not to exceed 8.3% of the gross proceeds provided that the Formation Loan
for the minimum  offering  period  could be 10% of the gross  proceeds  for that
period.  The Formation Loan is unsecured and is being repaid,  without interest,
in ten installments of principal,  over a ten year period commencing  January 1,
1992.  At December 31, 1992,  Redwood  Mortgage had borrowed  $914,369  from the
Partnership to cover sales commissions  relating to $11,998,359  limited partner
contributions (7.62%). Through December 31, 1997, $573,094 including $103,143 in
early withdrawal penalties,  had been repaid leaving a balance of $341,275.  The
Formation  Loan,  which is due from an affiliate of the General  Partners,  has
been deducted from Limited  Partners  capital in the balance sheet.  As amounts
are collected from Redwood Mortgage, the deduction from capital will be reduced.

B. Other Organizational and Offering Expenses

     Organizational  and  offering  expenses,   other  than  sales  commissions,
(including printing costs,  attorney and accountant fees, and other costs), were
paid by the Partnership. Such costs were limited to 10% of the gross proceeds of
the offering or $500,000  whichever was less.  The General  Partners were to pay
any amount of such expenses in excess of 10% of the gross proceeds or $500,000.

     Organization  costs of  $10,102  and  syndication  costs of  $415,692  were
incurred by the  Partnership.  The sum of organization  and  syndication  costs,
$425,794,  approximated 3.55% of the gross proceeds contributed by the Partners.
Both the  Organization  and  Syndication  Costs  have been fully  amortized  and
allocated to the Partners.
<PAGE>

                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 1997

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A. Accrual Basis

     Revenues and expenses are  accounted for on the accrual basis of accounting
wherein  income is recognized as earned and expenses are recognized as incurred.
Once a loan is categorized as impaired, interest is no longer accrued thereon.

B. Management Estimates

     In  preparing  the  financial  statements,  management  is required to make
estimates based on the information available that affect the reported amounts of
assets and  liabilities  as of the balance  sheet date and revenues and expenses
for the related periods.  Such estimates relate principally to the determination
of the  allowance  for doubtful  accounts,  including  the valuation of impaired
mortgage  investments,  and  the  valuation  of  real  estate  acquired  through
foreclosure. Actual results could differ significantly from these estimates.

C. Mortgage Investments, Secured by Deeds of Trust

     The  Partnership  has both the  intent  and  ability  to hold the  Mortgage
Investments to maturity, i.e., held for long-term investment. They are therefore
valued at cost for financial  statement  purposes  with  interest  thereon being
accrued by the simple interest method.

     Financial   Accounting  Standards  Board  Statements  (SFAS)  114  and  118
(effective  January 1, 1995) provide that if the probable  ultimate  recovery of
the carrying amount of a mortgage  investment,  with due  consideration  for the
fair value of  collateral,  is less than the  recorded  investment,  and related
amount due and the  impairment  is considered  to be other than  temporary,  the
carrying  amount of the investment  (cost) shall be reduced to the present value
of future cash flows.  The adoption of these  statements did not have a material
effect on the  financial  statements  of the  Partnership  because  that was the
valuation method previously used on impaired loans.

     At December 31,  1997,  1996 and 1995,  reductions  in the cost of Mortgage
Investments  categorized as impaired by the Partnership totalled $0, $9,595, and
$0  respectively.  The reduction in stated value was  accomplished by increasing
the allowance for doubtful accounts.

     As  presented  in Note 10 to the  financial  statements  as of December 31,
1997, the average mortgage investment to appraised value of security at the time
the loans were  consummated  was  60.30%.  When a loan is valued for  impairment
purposes, an updating is made in the valuation of collateral security.  However,
such a low loan to value ratio tends to minimize reductions for impairment.

D. Cash and Cash Equivalents

     For purposes of the  statements  of cash flows,  cash and cash  equivalents
include interest bearing and non-interest bearing bank deposits.

E. Real Estate Owned, Held for Sale

     Real estate owned,  held for sale,  includes real estate  acquired  through
foreclosure,  and is  stated  at the  lower of the  recorded  investment  in the
property,  net of any senior  indebtedness,  or at the propertys estimated fair
value, less estimated costs to sell.
<PAGE>
<TABLE>
                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 1997

     The following  schedule  reflects the costs of real estate acquired through
foreclosure and the recorded reductions to estimated fair values, less estimated
costs to sell as of December 31, 1997 and 1996:

                                                                        December 31,
                                                       -----------------------------------------------
                                                            1997                            1996
                                                       ---------------                 ---------------
<CAPTION>
<S>                                                          <C>                           <C>       
Costs of properties                                          $906,499                      $1,655,786
Reduction in value                                            219,360                         187,441
                                                       ---------------                 ---------------

Fair value reflected in financial statements                 $687,139                      $1,468,345
                                                       ===============                 ===============
</TABLE>

     Effective  January 1, 1996,  the  Partnership  adopted  the  provisions  of
statement  No 121  (SFAS  121)  of the  Financial  Accounting  Standards  Board,
Accounting  for the Impairment of Long Lived Assets and for Long Lived Assets to
be disposed of. The adoption of SFAS 121 did not have a material  impact on the
Partnerships  financial  position because the methods indicated were essentially
those previously used by the Partnership.

F. Investment in Partnership (see note 5)

     The  Partnership  accounts  for  its  investment  in a  partnership  as  an
investment  in real estate,  which is at the lower of costs or fair value,  less
estimated costs to sell. At December 31, 1997, cost is considered less than fair
value and the investment is stated at cost in the financial statements.

G. Income Taxes

     No provision  for Federal and State  income taxes is made in the  financial
statements  since  income taxes are the  obligation  of the partners if and when
income taxes apply.

H. Organization and Syndication Costs

     The Partnership  bears its own  organization  and syndication  costs (other
than certain sales  commissions  and fees described  above)  including legal and
accounting expenses,  printing costs, selling expenses, a 1% wholesale brokerage
fee and filing fees.  Organizational  costs of $10,102 were capitalized and were
amortized  over a five year period.  Syndication  costs of $415,692 were charged
against partners capital and were allocated to individual  partners  consistent
with the Partnership Agreement.

I. Allowance for Doubtful Accounts

     Mortgage  Investments and the related accrued  interest,  fees and advances
are  analyzed  on a  continuous  basis  for  recoverability.  Delinquencies  are
identified and followed as part of the Mortgage  Investment  system. A provision
is made for doubtful  accounts to adjust the allowance for doubtful  accounts to
an amount  considered by management to be adequate,  with due  consideration  to
collateral value, to provide for unrecoverable  accounts  receivable,  including
impaired  mortgage  investments,   unspecified  mortgage  investments,   accrued
interest and advances on mortgage  investments,  and other  accounts  receivable
(unsecured).  The  composition  of the  allowance  for  doubtful  accounts as of
December 31, 1997 and 1996 was as follows:
<PAGE>
<TABLE>

                                                    REDWOOD MORTGAGE INVESTORS VII
                                                  (A California Limited Partnership)
                                                     NOTES TO FINANCIAL STATEMENTS
                                                           DECEMBER 31, 1997

                                                                        December 31,
                                                       -----------------------------------------------
                                                            1997                            1996
                                                       ---------------                 ---------------
<CAPTION>
<S>                                                                <C>                         <C>   
Impaired mortgage investments                                      $0                          $9,595
Unspecified mortgage investments                              284,738                          19,052
Accounts receivable, unsecured                                140,000                         200,000
                                                       ---------------                 ---------------
                                                             $424,738                        $228,647
                                                       ===============                 ===============
</TABLE>

J. Net Income Per $1,000 Invested

     Amounts  reflected  in the  statements  of income as net  income per $1,000
invested by Limited Partners for the entire period are actual amounts  allocated
to Limited  Partners who have their  investment  throughout  the period and have
elected to either  leave their  earnings to compound or have  elected to receive
monthly  distributions of their net income.  Individual income is allocated each
month  based on the  Limited  partners  pro rata  share of  Partners  Capital.
Because the net income percentage varies from month to month, amounts per $1,000
will vary for those  individuals  who made or  withdrew  investments  during the
period,  or select other  options.  However,  the net income per $1,000  average
invested  has  approximated  those  reflected  for those whose  investments  and
options have remained constant.
<PAGE>

                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 1997


NOTE 3 - GENERAL PARTNERS AND RELATED PARTIES

     The following are commissions and/or fees which will be paid to the General
Partners and/or related parties.

A. Mortgage Brokerage Commissions

     For  services  in  connection  with  the  review,  selection,   evaluation,
negotiation and extension of Mortgage  Investments in an amount up to 12% of the
principal  through the period ending 6 months after the termination  date of the
offering. Thereafter, loan brokerage commissions are limited to an amount not to
exceed  4% of  the  total  Partnership  assets  per  year.  The  loan  brokerage
commissions  are  paid  by  the  borrowers,  and  thus,  not an  expense  of the
Partnership.

B. Mortgage Servicing Fees

     Monthly  mortgage  servicing  fees of up to 1/8 of 1% (1.5%  annual) of the
unpaid  principal,  or such lesser amount as is reasonable  and customary in the
geographic area where the property securing the Mortgage  Investment is located.
Mortgage servicing fees of $83,559,  $97,267 and $33,394 were incurred for years
1997, 1996 and 1995, respectively.

C. Asset Management Fee

     The General Partners  receive a monthly fee for managing the  Partnerships
Mortgage  Investment  portfolio  and  operations of up to 1/32 of 1% of the net
asset value (3/8 of 1% annual). No management fees have been incurred for years
1997, 1996 and 1995, respectively.

D. Other Fees

     The  Partnership  Agreement  provides for other fees such as  reconveyance,
Mortgage  assumption and Mortgage  extension fees. Such fees are incurred by the
borrowers and are paid to parties related to the General Partners.

E. Income and Losses

     All  income is  credited  or  charged  to  partners  in  relation  to their
respective  partnership  interests.  The  partnership  interest  of the  General
Partners (combined) is a total of 1%.

<PAGE>
                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 1997

     F.  Operating  Expenses The General  Partners or their  affiliate  (Redwood
Mortgage) are reimbursed by the Partnership for all operating  expenses actually
incurred by them on behalf of the  Partnership,  including  without  limitation,
out-of-pocket general and administration expenses of the Partnership, accounting
and audit fees,  legal fees and expenses,  postage and preparation of reports to
Limited  Partners.   Such  reimbursements  are  reflected  as  expenses  in  the
Statements of Income.

G. General Partners Contributions

     The General  Partners  collectively or severally were to contribute 1/10 of
1% in cash  contributions as proceeds from the offering were admitted to limited
Partner capital.  As of December 31, 1992 a General Partner,  GYMNO Corporation,
had  contributed  $11,998,  1/10  of  1% of  limited  partner  contributions  in
accordance with Section 4.02(a) of the Partnership Agreement.

NOTE 4 - OTHER PARTNERSHIP PROVISIONS

A. Applicant Status

     Subscription  funds received from  purchasers of units were not admitted to
the Partnership until appropriate lending  opportunities were available.  During
the period  prior to the time of  admission,  which ranged  between  1-120 days,
purchasers  subscriptions  remained  irrevocable  and earned  interest at money
market  rates,  which  were  lower  than the  return on the  Partnerships  loan
portfolio.

     Interest  earned prior to  admission  was credited to partners in applicant
status.  As Mortgage  Investments  were made and partners  were  transferred  to
regular status to begin sharing in income from Mortgage  Investments  secured by
deeds of trust,  the  interest  credited  was either  paid to the  investors  or
transferred to Partners Capital along with the original investment.

B. Term of the Partnership

     The term of the  Partnership  is  approximately  40  years,  unless  sooner
terminated as provided. The provisions provide for no capital withdrawal for the
first five  years,  subject  to the  penalty  provision  set forth in (E) below.
Thereafter,  investors  have the right to withdraw over a five-year  period,  or
longer.

C. Election to Receive Monthly, Quarterly or Annual Distributions

     Upon subscriptions,  investors elected either to receive monthly, quarterly
or  annual  distributions  of  earnings  allocations,  or to allow  earnings  to
compound for at least a period of 5 years.

D. Profits and Losses

     Profits and losses are allocated  among the Limited  Partners  according to
their respective capital accounts after 1% is allocated to the General Partners.

E. Liquidity, Capital Withdrawals and Early Withdrawals

     There  are  substantial   restrictions  on  transferability  of  Units  and
accordingly an investment in the Partnership is illiquid.  Limited Partners have
no right to  withdraw  from the  partnership  or to obtain  the  return of their
capital  account for at least one year from the date of  purchase  of Units.  In
order to provide a
<PAGE>

                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 1997

     certain  degree of  liquidity  to the Limited  Partners  after the one-year
period, Limited Partners may withdraw all or part of their Capital Accounts from
the Partnership in four quarterly  installments beginning on the last day of the
calendar  quarter  following  the quarter in which the notice of  withdrawal  is
given,  subject to a 10% early withdrawal penalty. The 10% penalty is applicable
to the  amount  withdrawn  as stated in the  Notice  of  Withdrawal  and will be
deducted from the Capital Account and the balance  distributed in four quarterly
installments.  Withdrawal  after the  one-year  holding  period  and  before the
five-year holding period will be permitted only upon the terms set forth above.

     Limited  Partners  also have the right  after  five  years from the date of
purchase of the Units to withdraw from the partnership on an installment  basis,
generally  over a five year  period in twenty  (20)  quarterly  installments  or
longer.  Once this five year  period  expires,  no  penalty  will be  imposed if
withdrawal   is  made  in  twenty  (20)   quarterly   installments   or  longer.
Notwithstanding  the  five-year  (or  longer)  withdrawal  period,  the  General
Partners will liquidate all or part of a Limited  Partners  capital  account in
four quarterly  installments  beginning on the last day of the calendar  quarter
following the quarter in which the notice of  withdrawal is given,  subject to a
10% early withdrawal  penalty applicable to any sums withdrawn prior to the time
when such sums could have been  withdrawn  pursuant to the five-year (or longer)
withdrawal period.

     The Partnership will not establish a reserve from which to fund withdrawals
and,  accordingly,  the  Partnerships  capacity  to return a Limited  Partners
capital  account is restricted to the  availability  of  Partnership  cash flow.
Furthermore,  no more than 20% of the total Limited  Partners  capital accounts
outstanding at the beginning of any year shall be liquidated during any calendar
year.

F. Guaranteed Interest Rate For Offering Period

     During the period commencing with the day a Limited Partner was admitted to
the  Partnership  and ending 3 months after the offering  termination  date, the
General  partners  guaranteed  an  interest  rate equal to the greater of actual
earnings from mortgage operations or 2% above The Weighted Average cost of Funds
Index for the Eleventh  District Savings  Institutions  (Savings & Loan & Thrift
Institutions)  as  computed  by the  Federal  Home  Loan  Bank of San  Francisco
monthly, up to a maximum interest rate of 12%. The guarantee amounted to $12,855
and $5,195 in 1990 and 1991, respectively.  In 1992 and 1993, actual realization
exceeded the  guaranteed  amount each month.  Beginning  with fiscal years after
1993, the guarantee no longer applies.

NOTE 5 - INVESTMENT IN PARTNERSHIP

     The Partnerships interest in land, acquired through foreclosure, located in
East Palo Alto with costs totalling  $346,017 has been invested with that of two
other  Partnerships  (total cost to date,  primarily  land, of  $1,458,721) in a
partnership  which is in the  process of  obtaining  approval  for  constructing
approximately 63 single family homes for sale.  Redwood Mortgage Investors V, VI
and VII have first priority on return of investment  plus interest  thereon,  in
addition to a share of profits realized.

NOTE 6 - LEGAL PROCEEDINGS

     The  Partnership  is not a defendant in any legal actions.  However,  legal
actions against  borrowers and other involved parties have been initiated by the
Partnership  to help  assure  payments  against  unsecured  accounts  receivable
totalling $252,422 at December 31, 1997.
<PAGE>

                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 1997

     Management  anticipates  that the ultimate  results of these cases will not
have a material  adverse effect on the net assets of the  Partnership,  with due
consideration  having  been given in  arriving  at the  allowance  for  doubtful
accounts.

NOTE 7 - NOTE PAYABLE BANK - LINE OF CREDIT

     The  Partnership  has a  bank  line  of  credit  secured  by  its  Mortgage
Investment  portfolio  of up to  $3,000,000  at .50% over  prime.  The  balances
outstanding  as of December 31, 1997 and 1996 were  $2,341,816,  and  $1,175,000
respectively,  and the interest rate at December 31, 1997 was 9.00% (8.50% prime
+ .50%). The expiration date of the line of credit is September 1, 1998.

NOTE 8 - INCOME TAXES

     The following reflects a reconciliation  from net assets (Partners Capital)
reflected in the financial statements to the tax basis of those net assets:
<TABLE>

                                                                        December 31,
                                                       -----------------------------------------------
                                                             1997                           1996
                                                        ----------------               ---------------
<CAPTION>
<S>                                                        <C>                           <C>        
Net assets - Partners Capital per financial                $12,879,547                   $13,585,344
statements

Formation loan receivable                                       341,275                       429,163
Allowance for doubtful accounts                                 424,738                       228,647
                                                        ----------------               ---------------
Net assets tax basis                                        $13,645,560                   $14,243,154
                                                        ================               ===============
</TABLE>

     In 1997,  approximately  68% of taxable  income was allocated to tax exempt
organizations i.e.,  retirement plans. Such plans do not have to file income tax
returns unless their  unrelated  business  income exceeds  $1,000.  Applicable
amounts become taxable when distribution is made to participants.

NOTE 9 - FAIR VALUE OF FINANCIAL INSTRUMENTS

     The following  methods and assumptions were used to estimate the fair value
of financial instruments:

     (a) Cash and Cash  Equivalents - The carrying amount equals fair value. All
amounts, including interest bearing, are subject to immediate withdrawal.

     (b) The  Carrying  Value  of  Mortgage  Investments  - (see  note 2 (c)) is
$13,449,741.   The  December  31,  1997  fair  value  of  these  investments  of
$13,572,988  is estimated  based upon  projected  cash flows  discounted  at the
estimated  current  interest  rates at which  similar  loans would be made.  The
applicable  amount of the  allowance  for doubtful  accounts  along with accrued
interest and advances  related  thereto  should also be considered in evaluating
the fair value versus the carrying value.
<PAGE>

                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 1997

NOTE 10 - ASSET CONCENTRATIONS AND CHARACTERISTICS

     The  Mortgage  Investments  are  secured  by  recorded  deeds of trust.  At
December  31,  1997,  there were 62 Mortgage  Investments  outstanding  with the
following characteristics:

Number of Mortgage Investments outstanding                                62
Total Mortgage Investments outstanding                           $13,449,741

Average Mortgage Investment outstanding                             $216,931
Average Mortgage Investment as percent of total                         1.61%
Average Mortgage Investment as percent of Partners Capital              1.68%

Largest Mortgage Investment outstanding                           $1,400,000
Largest Mortgage Investment as percent of total                        10.41%
Largest Mortgage Investment as percent of Partners Capital             10.87%

Number of counties where security is located(all California)              14

Largest percentage of Mortgage Investments in one county               27.93%
Average Mortgage Investment to appraised value of security at time
loan was consummated                                                   60.30%

Number of Mortgage Investments in foreclosure                              2

     The following  categories of mortgage investments are pertinent at December
31, 1997 and 1996:
<TABLE>

                                                                          December 31,
                                                            ------------------------------------------
                                                                  1997                      1996
                                                            -----------------          ---------------
<CAPTION>
<S>                                                               <C>                      <C>       
First Trust Deeds                                                 $6,810,113               $4,199,552
Second Trust Deeds                                                 5,719,369                6,913,853
Third Trust Deeds                                                    720,258                  722,887
Fourth Trust Deeds                                                   200,001                  200,001
                                                            -----------------          ---------------
  Total mortgage investments                                      13,449,741               12,036,293
Prior liens due other lenders                                     17,951,579               22,069,554
                                                            -----------------          ---------------
  Total debt                                                     $31,401,320              $34,105,847
                                                            =================          ===============

Appraised property value at time of loan                         $52,077,885              $51,863,991
                                                            =================          ===============

Total investments as a percent of appraisals                          60.30%                   65.76%
                                                            =================          ===============

Investments by Type of Property

Owner occupied homes                                              $1,104,742               $1,742,767
Non-Owner occupied homes                                           1,464,596                1,112,274
Apartments                                                         1,666,916                1,325,872
Commercial                                                         9,213,487                7,855,380
                                                            =================          ===============
                                                                 $13,449,741              $12,036,293
                                                            =================          ===============
</TABLE>
<PAGE>


                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 1997

     Scheduled  maturity  dates of mortgage  investments as of December 31, 1997
are as follows:

                        Year Ending
                        December 31,
                     -------------------

                            1998                           $3,960,683
                            1999                            2,182,183
                            2000                            1,508,571
                            2001                            1,074,979
                            2002                            1,322,030
                         Thereafter                         3,401,295
                                                        ===============
                                                          $13,449,741
                                                         ===============

     The  scheduled  maturities  for 1998 include  approximately  $1,313,029  in
eleven  mortgage  investments  which are past  maturity  at December  31,  1997.
Interest payment on most of these loans are current.  $110,000 of those Mortgage
Investments were categorized as delinquent over 90 days.

     Five  mortgage  investments  with  principal  outstanding  of $480,895  had
interest  payments  overdue in excess of 90 days. Two Mortgage  Investments with
principal outstanding of $245,250 were considered impaired at December 31, 1997.
That is interest accruals are no longer recorded thereon.

     The cash  balance at December  31, 1997 of $520,837 was in one bank with an
interest  bearing  balance  totalling  $502,583.   The  balances  exceeded  FDIC
insurance  limits (up to $100,000 per bank) by  $420,837.  This bank is the same
financial  institution  that has provided the  Partnership  with the  $3,000,000
limit line of credit.  At December 31, 1997, draw down against this facility was
$2,341,816.  As and when deposits in the  Partnerships  bank accounts  increase
significantly  beyond the  insured  limit,  the funds are  either  placed on new
Mortgage Investments or used to pay-down on the line of credit balance.
<PAGE>
<TABLE>
                                 SCHEDULE II AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS,
                                    PROMOTERS, AND EMPLOYEES OTHER THAN RELATED PARTIES. Rule 12-03


Column A                    Column B               Column C            Column D                   Column E
Name of Debtor              Balance Beginning      Additions                 Deductions            Balance at end of period
                            of period 12/31/96                          (1)            (2)           (1)           (2)
                                                                      Amounts        Amounts       Current     Not Current
                                                                     collected     written off              12/31/97
<CAPTION>
<S>                           <C>                     <C>             <C>            <C>            <C>           <C>     
Redwood Mortgage .            $429,163                $0.00           $60,223        $27,665*       $0.00         $341,275


</TABLE>

     The above  schedule  represents  the  Formation  Loan  borrowed  by Redwood
Mortgage from the Partnership to pay for the selling commissions on Units. It is
an  unsecured  loan  and  will not bear  interest.  It is  being  repaid  to the
Partnership in ten annual  installments of principal only which began January 1,
1992.

     * The amount  written  off  represents  the  proportionate  amount of early
withdrawal  penalties  allocated  to the  Formation  Loan as provided for in the
Prospectus.

<PAGE>
<TABLE>
                                           SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
                                                    REDWOOD MORTGAGE INVESTORS VII


Column A              Column B                     Column C                Column D           Column E
Description           Balance at                   Additions               Deductions         Balance at
                                      ------------------------------------
                      beginning of           (1)                (2)          Describe         End of Period
                      of period       Charged to         Charged to                 *
                                      Costs & Expenses   Other accounts -
                                                         Describe
<CAPTION>

Year Ended
12/31/97

Deducted from
Asset accounts:

Allowance for
<S>                      <C>              <C>                    <C>            <C>              <C>     
Doubtful accts           $228,647         $374,499               $0             $178,408         $424,738


Cumulative
write-down of
Real Estate held
for sale (REO)           $187,441          $59,996                $0            $28,077         $219,360
                       --------------    -------------       -------------     -----------      --------------

Total                    $416,088         $434,495                $0            $206,485        $644,098
                       =============    ==============       =============     ===========      ==============

<FN>
(*) represents loss on Mortgage Investments and real estate held for sale.
</FN>
</TABLE>
<PAGE>

<TABLE>
SCHEDULE IX

                                                         SHORT TERM BORROWINGS
                                                    REDWOOD MORTGAGE INVESTORS VII

RULE 12-10

Column A                Column B         Column C            Column D              Column E            Column F
Category of Aggregate   Balance at End   Weighted Average    Maximum Amount        Average Amount      Weighted Average
Short-Term Borrowings   of Period        Interest Rate       Outstanding           Outstanding         Interest Rate
                                                                                                       during
                                                             During the Period     During the Period   the period
======================= ================ =================== ===================== =================== ===================
<CAPTION>


<S>                       <C>                  <C>                <C>                  <C>                  <C>    
Year-Ended 12/31/97       $2,341,816           9.204%             $3,000,000           $2,154,728           9.2041%
</TABLE>
<PAGE>

<TABLE>

SCHEDULE XII

                                                 MORTGAGE INVESTMENTS ON REAL ESTATE.
                                               RULE 12-29 MORTGAGE LOANS ON REAL ESTATE

Col. A    Col. B    Col. C    Col. D      Col. E     Col. F       Col. G         Col. H     Col. I    Col. J
Descp.    Interest  Final     Periodic    Prior      Face Amt.    Carrying     Principal    Type of   Geographic
          Rate      Maturity  Payment     Liens      of           amount of    amount of    Lien      County
                    Date      Terms                  Mortgage     Mortgage     Mortgage               Location
                                                     Investments  Investments  Investments
                                                     (original                 subject to
                                                     amount)                   Delinq.
                                                                               Principal
                                                                               or Interest
========= ========= ========= =========== ========== ============ ============ ============ ========= ==============
<CAPTION>
<S>        <C>      <C>           <C>        <C>       <C>          <C>           <C>       <C>       <C>         
Res.       13.000%  01/01/03      999.54     15,400    79,000.00    47,101.66     0.00      1st Mtg   San Mateo
Res        10.000%  08/01/97      388.67    309,872    45,000.00    46,566.02     0.00      3rd Mtg   San Mateo
Res        15.250%  04/01/95      588.29     11,601    45,800.00    44,430.56     0.00      1st Mtg   Solano
Res        13.750%  10/01/96      916.67    369,163    80,000.00    80,000.00     0.00      1st Mtg   San Mateo
Res        13.750%  10/01/96      988.28       0.00    86,250.00    86,250.00     0.00      1st Mtg   Santa Clara
Res        12.500%  02/01/07      369.76       0.00    30,000.00    24,106.62     0.00      1st Mtg   Santa Cruz
Res        10.000%  04/17/97      132.08    126,800    15,850.00    15,781.88     0.00      1st Mtg   Sonoma
Land       15.000%  06/01/93    1,375.00    210,000   110,000.00   110,000.00     0.00      3rd Mtg   Sacramento
Land       15.500%  07/15/94    1,453.13       0.00   112,500.00   112,500.00     0.00      1st Mtg   San Mateo
Comm       12.000%  05/01/98    4,517.38    796,163   439,172.47   428,442.12     0.00      3rd Mtg   Contra Costa
Comm       12.250%  01/01/98    4,083.36    354,077   400,002.42   400,002.42     0.00      1st Mtg   Contra Costa
Res        12.000%  01/10/04      150.00    208,000    15,000.00     7,707.25     0.00      1st Mtg   San Mateo
Comm       12.000%  06/01/98    2,038.01       0.00   239,850.00   194,790.33     0.00      1st Mtg   Sonoma
Apts        6.500%  05/01/06      540.83     89,904    75,000.00    96,716.11     0.00      1st Mtg   Sacramento
Res        12.000%  07/01/98    3,085.84     85,930   300,000.00   274,178.59  274,178.59   1st Mtg   El Dorado
Res        12.750%  07/01/08      370.90    236,164    29,700.00    25,765.41     0.00      1st Mtg   San Mateo
Res        13.500%  09/01/08    1,647.07    106,044   126,861.90   112,200.55     0.00      1st Mtg   Contra Costa
Comm       12.000%  09/01/03      848.61       0.00    82,500.00    80,900.20     0.00      1st Mtg   Alameda
Comm       12.000%  11/01/98    2,057.23      5,635   200,000.00    53,288.35     0.00      1st Mtg   Sacramento
Comm       10.000%  12/01/98      647.21       0.00    73,750.00    72,847.32     0.00      1st Mtg   Stanislaus
Comm       12.250%  01/01/98    2,080.84    891,453   114,286.40   200,001.20     0.00      4th Mtg   Contra Costa
Comm       10.000%  12/01/98    3,619.98       0.00   412,500.00   406,541.72     0.00      1st Mtg   Alameda
Comm        7.000%  12/01/03      575.74    281,250    49,586.38    40,560.78     0.00      1st Mtg   Alameda
Comm       12.000%  02/01/99    3,420.75       0.00   335,638.30   335,638.30     0.00      1st Mtg   Santa Clara
Land       12.000%  07/01/96    1,352.50    679,258   135,250.00   135,250.00  135,250.00   3rd Mtg   Sonoma
Res        11.000%  10/01/99      571.39    478,120    60,000.00    59,032.95     0.00      1st Mtg   San Mateo
Land       13.750%  12/20/96    7,366.08    338,793   757,144.25   240,000.45     0.00      1st Mtg   Stanislaus
Apts        7.000%  02/10/05      234.06    160,500    40,125.00    40,125.00     0.00      1st Mtg   San Francisco
Res        12.000%  03/01/98    1,562.62       0.00   280,000.00   153,320.99     0.00      1st Mtg   Alameda
Apts       11.500%  04/01/05      453.88       0.00   550,000.00    45,833.34     0.00      1st Mtg   San Francisco
Comm       11.875%  02/01/06    4,437.00       0.00   425,000.00   419,631.26     0.00      1st Mtg   San Mateo
Comm       12.000%  12/31/01    9,792.73  5,492,794   955,000.00   979,272.93     0.00      1st Mtg   Santa Clara
Land       12.000%  02/01/97    3,822.50       0.00   382,250.00   382,250.00     0.00      1st Mtg   Santa Clara
Apts       12.000%  02/01/98    1,538.89     60,738  1,427,500.00   84,241.05     0.00      1st Mtg   San Francisco
Comm       12.000%  02/01/99      124.00    312,000    12,000.00    12,000.00     0.00      1st Mtg   Santa Clara
Res        13.000%  12/01/99      704.17       0.00    65,000.00    65,000.00     0.00      1st Mtg   Ventura
Res        13.000%  12/01/99      140.83       0.00    65,000.00    13,000.00     0.00      1st Mtg   Ventura
Res        13.000%  12/01/99      140.83       0.00    65,000.00    13,000.00     0.00      1st Mtg   Ventura
Res        12.000%  01/01/98    1,700.00       0.00   170,000.00   170,000.00     0.00      1st Mtg   Alameda
Land       12.000%  01/01/00    9,500.00     89,692   950,000.00   950,000.00     0.00      1st Mtg   Stanislaus
Apts       10.750%  04/01/07   12,541.67  5,222,598  1,400,000.00 1,400,000.00    0.00      1st Mtg   Alameda
Land       12.000%  05/01/99    2,354.00       0.00   235,400.00   235,400.00     0.00      1st Mtg   San Mateo
Res        11.500%  11/01/98    2,012.50       0.00   210,000.00   210,000.00     0.00      1sst Mtg  San Francisco
Comm       11.500%  05/01/99    5,366.67       0.00   560,000.00   560,000.00     0.00      1st Mtg   Alameda
Comm       12.000%  07/01/02   10,500.00       0.00  1,350,000.00 1,050,000.00    0.00      1st Mtg   San Francisco
Res        12..00%  01/01/99    3,626.03    250,668   700,000.00   395,015.54     0.00      1st Mtg   Monterey
Res         9.000%  09/01/07      154.77     61,645    12,217.98    12,027.14     0.00      1st Mtg   San Mateo
</TABLE>
<PAGE>
<TABLE>

Col. A    Col. B    Col. C    Col. D      Col. E     Col. F       Col. G         Col. H     Col. I    Col. J
Descp.    Interest  Final     Periodic    Prior      Face Amt.    Carrying     Principal    Type of   Geographic
          Rate      Maturity  Payment     Liens      of           amount of    amount of    Lien      County
                    Date      Terms                  Mortgage     Mortgage     Mortgage               Location
                                                     Investments  Investments  Investments
                                                     (original                 subject to
                                                     amount)                   Delinq.
                                                                               Principal
                                                                               or Interest
========= ========= ========= =========== ========== ============ ============ ============ ========= ==============
<CAPTION>
<S>        <C>      <C>           <C>       <C>       <C>           <C>           <C>       <C>       <C>          
Res        10.500%  10/01/01      865.34    138,202   110,000.00    95,706.34     0.00      1st Mtg   Santa Cruz
Res        11.500%  04/01/99    9,993.00    210,000   561,750.00    85,665.18     0.00      1st Mtg   San Francisco
Land       13.000%  10/01/00    5,200.00       0.00   480,000.00   480,000.00     0.00      1st Mtg   Solano
Land       12.000%  05/01/99      460.00    235,400    46,000.00    46,000.00     0.00      1st Mtg   San Mateo
Res        12.000%  05/01/99    1,162.80       0.00  1,225,000.00  362,430.60     0.00      1st Mtg   San Francisco
Comm.      12.000%  01/01/03    8,328.21       0.00  1,075,000.00  832,820.75     0.00      1st Mtg   Alameda
Comm        9.000%  08/06/02      371.29     17,382    46,803.50    43,977.26     0.00      1st Mtg   Alameda
Comm        8.000%  09/01/03      976.00       0.00   133,000.00   123,319.67     0.00      1st Mtg   San Mateo
Res         8.000%  05/01/09      753.50       0.00    81,825.00    68,576.13     0.00      1st Mtg   Alameda
Comm        9.000%  05/10/02      670.52       0.00    83,333.33    81,751.22     0.00      1st Mtg   Shasata
Res         8.000%  09/27/00      530.79    106,333    79,619.05    78,571.43     0.00      1st Mtg   Monterey
Land        8.000%  12/01/97      400.00       0.00    60,000.00    60,000.00     0.00      1st Mtg   Solano
Res         8.000%  09/18/03       87.56       0.00    11,932.83    11,806.37     0.00      1st Mtg   Sonoma
Res         8.000%  09/30/03       89.71       0.00    12,225.92    12,096.94     0.00      1st Mtg   Sonoma
Comm        7.000%  07/01/02    1,037.78       0.00   146,666.66   146,301.16     0.00      1st Mtg   Contra Costa

Totals                    $147,818.79  $17,951,579  $18,458,291.39 $13,449,741.09  $409,428.59
<FN>
     Notes: Mortgage Investments classified as impaired Mortgage Investments had
principal balances  totalling  $245,250 at December 31, 1997.  Impaired Mortgage
Investments  are  defined  as  Mortgage  Investments  where the costs of related
balances  exceeds  the  anticipated  fair value less costs to  collect.  Accrued
interest is no longer recorded thereon.

     Amounts  reflected  in column G (carrying  amount of Mortgage  Investments)
represents both costs and the tax basis of the Mortgage Investments.
</FN>
</TABLE>
<PAGE>
<TABLE>

Schedule XII

     Reconciliation  of carrying amount (cost) of Mortgage  Investments at close
of periods

                                                             Year ended December 31,
                                            ----------------------------------------------------------

                                                 1997                  1996                 1995
                                            ---------------       ---------------      ---------------
<CAPTION>
<S>                                             <C>                  <C>                  <C>        
Balance at beginning of year                    12,036,293           $12,382,641          $11,345,566
                                            ---------------       ---------------      ---------------
Additions during period:
New Mortgage Investments                         7,841,128             9,099,688            3,592,507
Other                                                    0                     0                    0
                                            ---------------       ---------------      ---------------
                  Total Additions                7,841,128             9,099,688            3,592,507
                                            ---------------       ---------------      ---------------


Deduction during period:
Collections of principal                         6,278,832             8,923,339            1,980,879
Foreclosures                                       148,848               492,697              485,322
Cost of Mortgage Investments sold                        0                     0                    0
Amortization of Premium                                  0                     0                    0
Other                                                    0                30,000               89,231
                                            ---------------       ---------------      ---------------
                  Total Deductions               6,427,680             9,446,036            2,555,432
                                            ---------------       ---------------      ---------------

Balance at close of year                       $13,449,741           $12,036,293          $12,382,641
                                            ===============       ===============      ===============
</TABLE>
<PAGE>

            Item 9 - Changes in and Disagreements with Accountants on
                       Accounting and Financial Disclosure

     The  Partnership  has neither  changed its accountants nor does it have any
disagreement  on any matter of  accounting  principles or practices of financial
statement disclosures.

                                    Part III

          Item 10 - Directors and Executive Officers of the Registrant

     The Partnership has no Officers or Directors. Rather, the activities of the
Partnership  are managed by the three General  Partners of which two individuals
are D. Russell  Burwell and Michael R.  Burwell.  The third  General  Partner is
Gymno Corporation,  a California  corporation,  formed in 1986. The Burwells are
the two shareholders of Gymno Corporation, a California corporation, on an equal
(50-50) basis.

<PAGE>
Item 11 - Executive Compensation

COMPENSATION OF THE GENERAL PARTNERS AND AFFILIATES BY PARTNERSHIP

     As  indicated  above  in  Item  10,  the  Partnership  has no  officers  or
directors. The Partnership is managed by the General Partners. There are certain
fees and other items paid to management and related parties.

     A more  complete  description  of management  compensation  is found in the
Prospectus, pages 12-13, under the section Compensation of the General partners
and the Affiliates,  which is incorporated  by reference.  Such  compensation is
summarized below.

     The  following  compensation  has been  paid to the  General  Partners  and
Affiliates  for services  rendered  during the year ended December 31, 1997. All
such compensation is in compliance with the guidelines and limitations set forth
in the Prospectus.

Entity Receiving    Description of Compensation and Services Rendered     Amount
Compensation
------------------------------------------------------------------ ------------

I.  Redwood Mortgage  Mortgage Servicing Fee for servicing       
                      Mortgage Investments                              $83,559
General Partners &/or
Affiliate             Asset Management Fee for managing assets          $0
                     

General Partners      1% interest in profits                            $8,269
                           
     II. FEES PAID BY  BORROWERS  ON MORTGAGE  INVESTMENTS  PLACED BY  COMPANIES
RELATED TO THE GENERAL PARTNERS WITH THE PARTNERSHIP  (EXPENSES OF BORROWERS NOT
OF THE PARTNERSHIP)

Redwood Mortgage.   Mortgage  Brokerage  Commissions  for  services in
                    connection    with    the    review,    selection,
                    evaluation,  negotiation,  and  extension  of  the
                    Mortgage  Investments  paid by the  borrowers  and
                    not by the Partnership                            $377,101
                         
Redwood Mortgage    Processing   and  Escrow  Fees  for   services  in
                    connection  with  notary,   document  preparation,
                    credit  investigation,  and escrow fees payable by
                    the borrowers and not by the Partnership            $6,196
                           


     III. IN ADDITION, THE GENERAL PARTNERS AND/OR RELATED COMPANIES PAY CERTAIN
EXPENSES ON BEHALF OF THE PARTNERSHIP FOR WHICH IT IS REIMBURSED AS NOTED IN THE
STATEMENT OF INCOME.                                                    $37,760

<PAGE>

Item 12 - Security Ownership of Certain Beneficial Owners and Management

     The General  Partners are to own a combined total of 1% of the  Partnership
including a 1% portion of income and losses.

Item 13 - Certain Relationships and Related Transactions

     Refer to footnote 3 of the notes to financial  statements in Part II item 8
which describes related party fees and data.

     Also refer to the Prospectus dated October 20, 1989 (incorporated herein by
reference) on page 12  Compensation of General Partners and Affiliates and page
14 Conflicts of Interest.
                                     Part IV

Item 14 - Exhibits, Financial Statements and Schedules, and Reports on Form 8-K.

A.       Documents filed as part of this report are incorporated:

         1. In Part II, Item 8 under A - Financial Statements.

         2. The Financial Statement Schedules are listed in Part II-Item 8 under
            B   -    Financial Statement Schedules.

<PAGE>

3.  Exhibits.

  Exhibit No.           Description of Exhibits
-----------------       --------------------------

3.1   Limited Partnership Agreement
3.2   Form of Certificate of Limited Partnership Interest
3.3   Certificate of Limited Partnership
10.1  Escrow Agreement
10.2  Servicing Agreement
10.3  (a) Form of Note secured by Deed of Trust which provides for principal and
       interest payments.
      (b) Form of Note secured by Deed of Trust which provides principal and
      interest payments and right of assumption
      (c) Form of Note secured by Deed of Trust which provides for interest only
       payments
      (d) Form of Note
10.4 (a) Deed of Trust and Assignment of Rents to accompany Exhibits 10.3 (a),
      and (c)
     (b) Deed of Trust and Assignment of Rents to accompany Exhibit 10.3 (b)
     (c) Deed of Trust to accompany Exhibit 10.3 (d)
10.5  Promissory Note for Formation Loan
10.6  Agreement to Seek a Lender
24.1  Consent of Parodi & Cropper
24.2  Consent of Stephen C. Ryan & Associates.



     All of these exhibits were previously filed as the exhibits to Registrants
Statement on Form S-11  (Registration No. 33-30427 and incorporated by reference
herein).


B.       Reports of Form 8-K.

         No reports on Form 8-K have been filed during the last quarter of the
         period covered by this report.

C.       See A (3) above.

D.      See A (2) above.  Additional  reference is made to the prospectus  (S-11
filed as part of the Registration  Statement) dated October 20, 1989 to pages 65
through 67 and  Supplement #5 dated February 14, 1992 for financial data related
to Gymno Corporation, a General Partner.
<PAGE>

                                   SIGNATURES

     Pursuant  to the  requirements  of Section  13 or 15 (d) of the  Securities
Exchange Act of 1934 the  registrant has duly caused this report to be signed on
its behalf by the undersigned, thereto duly authorized on the 23rd day of March,
1998.


REDWOOD MORTGAGE INVESTORS VII


By:      /S/ D. Russell Burwell
         ---------------------------------------------
         D. Russell Burwell, General Partner


By:      /S/ Michael R. Burwell
         ---------------------------------------------
         Michael R. Burwell, General Partner


By:      Gymno Corporation, General Partner


         By:     /S/ D. Russell Burwell
                 ---------------------------------------------
                 D. Russell Burwell, President


         By:     /S/ Michael R. Burwell
                 ---------------------------------------------
                 Michael R. Burwell, Secretary/Treasurer


     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
report has been signed below by the following person on behalf of the registrant
and in the capacity indicated on the 23rd day of March, 1998.


Signature                          Title                                Date


/S/ D. Russell Burwell
-----------------------
D. Russell Burwell          General Partner                       March 23, 1998


/S/ Michael R. Burwell
-----------------------
Michael R. Burwell          General Partner                       March 23, 1998



/S/ D. Russell Burwell
-----------------------
D. Russell Burwell     President of Gymno Corporation,            March 23, 1998
                       (Principal Executive Officer);
                       Director of Gymno Corporation


/S/ Michael R. Burwell
----------------------
Michael R. Burwell      Secretary/Treasurer of Gymno              March 23, 1998
                        Corporation (Principal Financial
                        and Accounting Officer);
                        Director of Gymno Corporation